New debt packages and terms can help match cash flow to crop price reality

Do you need to shave 50¢ to $1 per bushel off your breakeven for 2015? Depending on your debt level and how it’s structured, there just might be a way—and it’s less painful than you might think. Being proactive with your lender today could give you an edge in making it through several years of expected low crop prices.

Some lenders suggest restructuring current debt tools with new ones and lengthening terms. Doing so can free up six figures worth of working capital and ease the financial squeeze.

“Farmers have been trying to pay off debt within three to five years, but spreading it out can greatly reduce principal and interest payments,” says Mark Greenwood, senior vice president, AgStar Financial Services, part of the Farm Credit System. With predictions of low crop prices through 2016, “for some, it’s about survival,” he says.

To ease the pinch on cash flow, Greenwood suggests rolling land and machinery debt into a 20-year loan at around 5.5%. The annual machinery payment might be significantly lower, improving working capital. When considering a strategy like this, Greenwood encourages producers to carefully watch capital expenditures.

This strategy is not a free lunch, though. Producers will pay more over the full term of the loan as they are paying the note off more slowly with higher interest rates. What it provides in return is greater financial flexibility.

Not all lenders agree farmers need to pursue drastic strategies just yet. Joe Kessie, senior vice president of Lake City Bank in Warsaw, Ind., thinks restructuring is premature for most. “Farm balance sheets have never been stronger with adequate equity and working capital,” he says. Some crop insurance payments for 2014 might be significant, Kessie adds.

With $3.50 corn, Bob Campbell, senior vice president of Farm Credit Services of America, is worried about breaking even with land costs. In Iowa and Nebraska, typical real estate debt is $4,000 per acre. A 10-year real estate loan at 4.3% means a $502 per acre payment. Restructuring to 20 years at 5.3% cuts the land cost to $331 per acre, a more manageable payment.

“Producers have a window of time to consider options as interest rates remain favorable. It could be a different story 12 to 18 months from now,” Campbell says.

“Some farmers are using operating loans instead of acquiring immediate and long-term debt,” he says. “That pressures working capital.”

For example, if a farmer buys a $250,000 piece of equipment with an operating line and switches to a seven-year intermediate term loan, the annual payment drops to $35,000. That frees up $215,000, Mauszycki says.